After a day of legal arguments and evidence over the new swaps settlement, Rhodes said Thursday he will rule on the settlement at 10 a.m. April 11. During the hearing, Rhodes expressed concern about approving a settlement if his approval would validate the legality of the city’s 2009 decision to pledge its casino tax revenue as collateral on the swaps.

Rhodes rejected two previous settlements with the banks and the city of $230 million and $165 million, saying the deals were too generous for the banks and the debt might have been illegal to begin with.

The swaps — a complex pension debt interest-rate bet — were brokered by Mayor Kwame Kilpatrick’s administration in 2005 and 2006 to secure a steady interest rate of 6% on a $1.4-billion pension debt deal. The bet soured when U.S. interest rates plummeted, sticking the city with a $50 million-per-year bill.

Orr testified that he was close to filing a lawsuit against the banks on Jan. 31, challenging the legality of the swaps after Rhodes questioned their validity.

But, he said, the banks offered a settlement of $120 million at the last second and they agreed to continue negotiating. A few days later, the city agreed to accept $85 million, including January and February swaps payments of more than $8 million.

“My thinking was if we didn’t get an indication they were willing to make movement … that we should sue them,” Orr testified.

Pepper Hamilton attorney Robert Hertzberg, who is representing the city, argued that the settlement is “pretty straightforward” and can be approved despite Rhodes’ previous questioning of the swaps’ legality.

“This is not anything unusual. This takes place every single day in every single bankruptcy court across the United States,” Hertzberg said.

Orr has argued that the city must rid itself of the swaps so that it can free up cash to start reinvesting in services like police, fire and blight removal.

The city argued that it can’t take the risk of challenging the legality of the swaps because the banks could seize the $170 million in annual casino revenue that was pledged as collateral on the swaps in 2009. Orr also said it would cost millions of dollars per month to challenge the swaps.

But several major creditors objected to the deal, for various reasons.

Carole Neville, an attorney for the Detroit retiree committee, said Rhodes cannot allow the settlement because the casino revenue pledge was illegal.

“You can’t put the blinders on,” Neville said.

At issue is the legality of the city’s decision to pledge the casino revenue as collateral, an action that may not have been authorized under the Michigan Gaming Act.

“Is the city asking for the court to find ... that this use of the gaming revenues is consistent with the Michigan Gaming Act?” Rhodes asked.

Jones Day attorney Corinne Ball, who is representing Detroit, said the city is not asking for Rhodes to endorse the collateral pledge. But, she said, Rhodes can nonetheless approve bankruptcy settlements in which the liens have questionable validity.

“Bankruptcy courts repeatedly settle disputed claims,” Ball says.

Neville later retorted: “I don’t think that Ms. Ball can show you a case where a court has been allowed to approve a lien in violation of state law because it’s a settlement. It doesn’t make sense to me.”

Stephen Hackney, an attorney for bond insurer Syncora, the city’s fiercest opponent in bankruptcy court, argued that the banks don’t have the legal right to authorize a settlement. He said Syncora, which could lose tens of millions of dollars if the settlement is approved, must sign off on the deal.